APPROXIMATELY $6.2 BILLION OF RATED LONG-TERM G.O. DEBT AFFECTED
New York, October 13, 2011 -- Moody's Investors Service has downgraded to Aa3 from Aa2 the rating of
New Jersey'S School Bond Reserve Guarantee Program (Chapter 72),
which guarantees debt service on general obligation bonds issued by New
Jersey public school districts, as well as debt issued by New Jersey
counties and municipalities for educational purposes. The outlook
for the rating is stable. The rating action affects approximately
$6.2 billion of rated long-term guaranteed debt outstanding.
SUMMARY RATING RATIONALE
The downgrade to Aa3 from Aa2 reflects Moody's view that the program reserve
is thinly capitalized compared to its peer group of state school bond
guarantee funds, providing it only a moderate ability to withstand
defaults by several large issuers at once. Additionally,
weak mechanical provisions compared to peers' heighten the chance that
a default might occur due to human error, given the reserve's reliance
on school district officials to inform the State of an impending default.
The Aa3 rating reflects Moody's assessment of the program's ability to
make timely payments, should the need arise, on the $8.1
billion of guaranteed debt outstanding relative to the value of the program's
reserve corpus, valued at $91.1 million as of June
30, 2010, the latest date for which audited financials are
available. Additional credit considerations supporting the Aa3
rating on the Chapter 72 program include the high average credit quality
of New Jersey school district debt guaranteed by the program; the
reserve corpus's statutory protections as part of a constitutionally protected
trust fund established for the purpose of generating income to fund public
education in New Jersey; and statutory provisions facilitating timely
reimbursement of the corpus following a draw through the interception
of state aid moneys appropriated for issuers.
Of note, the program's rating is influenced by the financial condition
of the State of New Jersey, which is currently rated Aa3/stable
outlook, due to the program's reliance on statutory reimbursement
mechanisms to replenish the reserve corpus, the oversight role performed
by state treasury officials including the state treasurer when drawing
on the reserve, and through the underlying ratings of New Jersey
public school districts, whose individual ratings are also affected
by the rating of the state through the state's provision of state aid
revenues to partially fund school operations.
OUTLOOK
The assignment of a stable outlook to the rating reflects Moody's view
that: (a) the constitutional and statutory protections in place
to guard the reserve corpus are unlikely to be altered in the near term
to make the corpus less secure; (b) state oversight of public school
finances has become more, rather than less stringent in recent years;
(c) the reserve's leverage will increase and then level off in the near
future and remain constant thereafter due to existing statutory limitations;
and (d) the Reserve's track record of never having been drawn upon in
its 31-year history provides added comfort at the Reserve's present
rating level.
STRENGTHS:
- Constitutional protections for corpus of parent fund as outlined
in Article VIII of the New Jersey State Constitution
- Conservative and liquid investment portfolio
- Strong state oversight of New Jersey public school finances
- High average creditworthiness of New Jersey public school districts
- State aid intercept mechanism facilitates rapid replenishment
following a draw
CHALLENGES:
- Exceptionally high leverage level among peer group as measured
by size of Reserve corpus against total amount of guaranteed debt outstanding
- Mechanics are significantly weaker than those of peer group and
rely heavily on local officials to identify impending defaults
- Operational oversight of corpus is relatively undeveloped
WHAT COULD CHANGE THE RATING - UP:
A statutorily mandated decrease in the Reserve's leverage level
Growth in the size of the Reserve corpus
Strengthening of the Reserve's legal framework and mechanical protections
Increase in the average credit quality of New Jersey public school districts
WHAT COULD CHANGE THE RATING - DOWN:
A statutorily mandated increase in the reserve's leverage level
Decline in the reserve corpus below the statutorily mandated level
Weakening of the reserve's legal framework
A decline in the average credit quality of New Jersey public school districts
Diminishment of the financial resources devoted to public school assistance
by the State
The New Jersey Chapter 72 Bond Reserve rating was assigned by evaluating
factors believed to be relevant to the credit profile of the guarantor
such as i) constitutional and statutory protections for the corpus,
ii) strong state oversight of school districts including district takeover
authority, iii) state aid intercept use for replenishment of the
corpus following a drawdown, iv) pool size and concentration,
v) average creditworthiness of New Jersey school districts supported by
the reserve, vi) management and governance of the reserve and vii)
the nature and composition of the investment portfolio.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are considered EU Qualified
by Extension and therefore available for regulatory use in the EU.
Further information on the EU endorsement status and on the Moody's office
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For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
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are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
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Michael D'Arcy
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Julie Beglin
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
MOODY'S DOWNGRADES TO Aa3 FROM Aa2 NEW JERSEY'S SCHOOL BOND RESERVE GUARANTEE PROGRAM (CHAPTER 72); OUTLOOK IS STABLE